Beginning in mid-2016, Fannie Mae will incorporate “trended credit data” into its automated underwriting system Desktop Underwriter (DU).
You’re probably wondering what trended credit data is. In short, it’s a two-year picture of a consumer’s credit history with regard to how they manage revolving accounts.
Revolving accounts include credit cards and other credit accounts that allow borrowers to carry a balance over time or pay it off in full.
These differ from installment accounts, such as mortgages and auto loans, which have a fixed amount that is paid off in equal installments until maturity.
Banks and mortgage lenders are concerned about revolving accounts because they can provide clues about how a borrower might handle a mortgage, especially if they’ve never had one before.
For example, if a borrower is constantly carrying a balance on their credit card(s), and never making more than the minimum payment, this could be a sign that they’ll become a risky homeowner.
Conversely, a person who always pays down their debts in full each month, even if they aren’t required to do so, might send a signal to the banks that they’re ready for the responsibility of homeownership.
Transactors vs. Revolvers
While the two terms above might sound like heavy machinery, they’re not. They’re how the credit bureaus define us, based on our spending habits.
Those who make lots of transactions using credit, but pay them off in full each month are known as “transactors.”
Those who make lots of transactions but only make the minimum payment (or some payment less than the full amount due) are known as “revolvers” because they let their balances carry from month to month.
As you might expect, the latter group is the riskier of the two because it’s unclear if and when they’ll ever pay off their debts, or if they’ll just let them revolve forever.
The problem with existing credit reports is that they can’t always differentiate between these two types of spenders.
When you look at a credit report, you generally just see the current outstanding balances and the associated credit limits.
For a borrower with low credit limits this could make them look higher risk if they happen to have a relatively large amount of outstanding debt when the credit report is pulled, even if it will be paid off in full by the due date.
In fact, this type of borrower could be hurt by the existing credit report snapshot (versus two-year history) even if their debt is near/at zero because their credit limits are low.
On the other hand, you might have a consumer with lots of outstanding debt but also tons of available credit that only plans to make the minimum payment each month.
They might be rewarded in the credit score department because they have lots of available credit, even if their borrowing habits are worse than the consumer with lower limits.
This person might also be able to game the system by paying off their debts right before applying for a mortgage to look like a better borrower who doesn’t constantly revolve their debt.
It’s often recommended that you pay off your debts before applying for a mortgage to give your low credit score a boost (and also lower your DTI), assuming either might be a problem for you.
But this new two-year picture could make such a move less advantageous. Of course, Fannie Mae is presenting the inclusion of trended data as a positive for mortgage borrowers, but we’ll see how it plays out.
Less Paperwork Needed to Get a Mortgage
Everyone knows getting a mortgage can be a huge headache, what with all that paperwork. To ease this burden the company plans to introduce some other changes next year as well.
Fannie Mae will include nontraditional credit history (utility bills, cell phone, etc.) in DU as opposed to making underwriters manually review such files. This should help those with limited credit qualify for mortgages with less hassle.
Additionally, banks and lenders will soon be able to validate a borrower’s income via DU with data provided by Equifax’s The Work Number (TWN).
This means borrowers won’t have to come up with copies of their pay stubs, though they’ll still need to provide tax returns and other income documents.
I like where they’re going with this…it should streamline the process and make banks feel more comfortable about issuing mortgages, knowing the information they receive is accurate. But those looking to fudge the numbers might encounter more difficulty as verification technology improves.
It’s important to look at all credit but if someone makes a minimum payment they are still fulfilling their obligation. It might not be smart to pay that way but it’s still paying what is owed.